Excess home mortgage interest.In many areas of the U.S., real estate prices are escalating at an annual rate of 10-20%. Many personal residences now have a price tag in the millions of dollars. As a result, the mortgages on these residences could also be millions of dollars. Sec. 163(h)(3)(B) imposes a $1 million limit on home acquisition indebtedness INDEBTEDNESS. The state, of being in debt, without regard to the ability or inability of the party to pay the same. See 1 Story, Eq. 343; 2 Hill. Ab. 421. 2. ($500,000 if married filing separately Married Filing Separately A filing status for married couples who choose to record their respective incomes, exemptions and deductions on separate tax returns. This method is opposite to "married filing jointly" and has few benefits. ). The following example and Exhibit 1 show how to calculate the mortgage interest paid in excess of this limit.
Exhibit 1: Worksheet to Figure Qualified Loan Limit and Deductible Home
Mortgage Interest (from IRS Pub. 936, Home Mortgage Interest)
Part 1: Qualified loan limit
1. Average balance of grandfathered debt
(before 10/14/87) $ -0-
2. Average balance of mortgage principal:
(beginning + ending)/2 1,591,874
3. Maximum loan balance of $1,000,000 1,000,000
4. Larger of the amount on line 1 or on line 3 1,000,000
5. Add the amounts on lines 1 and 2 1,591,874
6. The smaller of the amount on line 4 or line 5 1,000,000
7. Enter the maximum of $100,000 allowed for home
equity debt 100,000
8. Add the amounts on lines 6 and 7. This is the
qualified loan limit. 1,100,000
Part II: Deductible home mortgage interest
9. The total of the average balances of all mortgages on
all qualified homes $1,591,874
10. Total amount of interest paid during the year
(refer to amortization schedule) 111,485
11. Divide the amount an line 8 by the amount on line 9 x0.691
12. Multiply the amount on line 10 by the decimal amount
on line 11. This is the allowable home mortgage
interest deduction. $ 77,036
13. Subtract the amount on line 12 from the amount on line
10. This is not home mortgage interest. $ 34,449
The question becomes how a practitioner should treat the mortgage interest of $34,449 that S paid in excess of the limit. Sec. 163(h)(1) disallows a deduction deduction, in logic, form of inference such that the conclusion must be true if the premises are true. For example, if we know that all men have two legs and that John is a man, it is then logical to deduce that John has two legs. for personal interest. Sec. 163(h)(2) defines personal interest as any interest paid other than: 1. Interest paid on a trade or business debt; 2. Investment interest; 3. Interest taken into account in computing computing - computer income or loss from a passive activity; 4. Qualified residence interest; 5. Interest on an unpaid portion of estate tax (under Sec. 6163); and 6. Interest on qualified education loans. If the residence meets certain criteria, S may be able to deduct de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. the $34,449 as investment interest on Schedule A. Sec. 163(d)(5)(A) defines property held for investment as: 1. Property that produces interest, dividends, annuities or royalties not derived in the ordinary course of a trade or business; 2. Property that produces gain or loss not derived in the ordinary course of a trade or business from the sale or exchange of property that either produces item 1 types of income or is held for investment (but which is not an interest in a passive activity); 3. An interest in a trade or business activity that is not a passive activity and in which the taxpayer did not materially participate. Does a primary residence fit into the definition of investment property under Category 2? Category 2 could be interpreted to include property that produces a gain or loss from the sale or trade of the property (excluding trade or business property). If S were to sell her residence for $4 million, net Of dosing costs, she would realize a $800,000 gain ($4 million less her cost basis of $3.2 million). As a single taxpayer who meets the time requirements for occupying the residence, S can exclude, under Sec. 121, $250,000 of the gain. She would thus have a taxable gain Taxable Gain The portion of a sale that is liable to taxation. Notes: When redistributing mutual fund shares that have increased in value, returns may be subject to taxation. See also: Capital gain, Income Tax of $550,000, which she would have to recognize in the year of disposition. Arguably ar·gu·a·ble adj. 1. Open to argument: an arguable question, still unresolved. 2. That can be argued plausibly; defensible in argument: three arguable points of law. , the definition of "investment property," under Sec. 163 (d) (5)(A), is not an all-inclusive list, as the language indicates that it "shall include" these three categories of property. This can be interpreted to mean that other types of investment property (not included in these three categories) can also meet the definition. Buying a principal residence is probably the largest investment most taxpayers will make in their lives. However, there are currently no specific cases or rulings that clarify this issue. Practitioners might be able to explore other alternatives in deducting the $34,449 as investment interest. Example 2: The facts are the same as in Example 1, except that S also has a substantial investment portfolio of liquid (and other) assets. S takes $500,000 from her investment portfolio and pays down the mortgage on her residence to $1,100,000. She refinances the mortgage with a new mortgage on her residence for $1,100,000. Now S has a new payment structure and amortization period for the mortgage. S borrows $500,000 on margin, secured by her investment portfolio, to restore her investment portfolio to its initial amount. The interest paid on the mortgage on the residence is fully deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). , and the interest paid on the margin loan is also deductible, subject to the investment-interest rules. Example 1: On Jan. 1,2001, S, a single taxpayer, purchased a home for $3,200,000. She obtained a mortgage for $1,600,000 at 7%, secured by the residence. Also in 2000, S earned a salary of $60,000 and received dividend and interest income totaling $54,000. The following table shows the amortization of the loan for 2001: Month in Monthly 2001 Beginning balance payments Principal Jan. $1,600,000.00 $10,644.84 $1,311.51 Feb. $1,598,688.49 $10,644.84 $1,319.16 March $1,597,369.33 $10,644.84 $1,326.85 April $1,596,042.48 $10,644.84 $1,334.59 May $1,594,707.89 $10,644.84 $1,342.38 June $1,593,365.51 $10,644.84 $1,350.21 July $1,592,015.30 $10,644.84 $1,358.08 Aug. $1,590,657.22 $10,644.84 $1,366.01 Sept. $1,589,291.21 $10,644.84 $1,373.97 Oct. $1,587,917.24 $10,644.84 $1,381.99 Nov. $1,586,535.25 $10,644.84 $1,390.05 Dec. $1,585,145.20 $10,644.84 $1,398.16 Total Month in 2001 Interest Ending balance Jan. $ 9,333.33 $1,598,688.49 Feb. $ 9,325.68 $1,597,369.33 March $ 9,317.99 $1,596,042.48 April $ 9,310.25 $1,594,707.89 May $ 9,302.46 $1,593,365.51 June $ 9,294.63 $1,592,015.30 July $ 9,286.76 $1,590,657.22 Aug. $ 9,278.83 $1,589,291.21 Sept. $ 9,270.87 $1,587,917.24 Oct. $ 9,262.85 $1,586,535.25 Nov. $ 9,254.79 $1,585,145.20 Dec. $ 9,246.68 $1,583,747.04 Total $111,485.12 The scenario in Example 2 works if S's investment portfolio included at least $500,000 of liquid assets Cash, or property immediately convertible to cash, such as Securities, notes, life insurance policies with cash surrender values, U.S. savings bonds, or an account receivable. (or other assets other assets Assets of relatively small value. For financial reporting purposes, firms frequently combine small assets into a single category rather than listing each item separately. ) which, when sold, would not generate a significant amount of taxable gain. It is unlikely that any part of the $34,449 disallowed residential interest could be capitalized Capitalized Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures for items with useful lives longer than one year. as part of the cost of the residence, which could be used to reduce any taxable gain realized when the residence was sold. Sec. 263A(f)(2)(B) excludes qualified residence interest from the uniform capitalization capitalization n. 1) the act of counting anticipated earnings and expenses as capital assets (property, equipment, fixtures) for accounting purposes. 2) the amount of anticipated net earnings which hypothetically can be used for conversion into capital assets. rules. Also, under Regs. Sec. 1.266-1(b)(2), additions to basis under Sec. 266 for carrying charges Payments made to satisfy expenses incurred as a result of ownership of property, such as land taxes and mortgage payments. Disbursements paid to creditors, in addition to interest, for extending credit. Consumer Protection laws require full disclosure of all carrying charges. do not apply to any items not otherwise deductible. As the cost of residential real estate continues to escalate es·ca·late v. es·ca·lat·ed, es·ca·lat·ing, es·ca·lates v.tr. To increase, enlarge, or intensify: escalated the hostilities in the Persian Gulf. v.intr. , many mortgages will exceed the deduction limits. How practitioners treat the excess interest will continue to be a challenge. Practitioners should advise clients in writing of their options. Before taking any position, practitioners should have a good-faith belief that, if challenged, the position has a realistic possibility of being sustained administratively or judicially. FROM ELIZABETH Elizabeth, sister of King Louis XVI of France Elizabeth, 1764–94, sister of King Louis XVI of France, known as Madame Elizabeth. Deeply loyal to her brother, she remained in France during the French Revolution, suffered imprisonment, and was C. CONNER, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , UNIVERSITY OF COLORADO University of Colorado may refer to:
Michael V the Caulker or Kalaphates (Greek: Μιχαήλ Ε΄ Καλαφάτης, . SCHAEFER, CPA, DENVER, CO (NEITHER AFFILIATED WITH SUMMIT INTERNATIONAL ASSOCIATES, INC inc - /ink/ increment, i.e. increase by one. Especially used by assembly programmers, as many assembly languages have an "inc" mnemonic. Antonym: dec. .) |
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